Bank of England May Hike Rates Within Months

The Bank of England said policy makers may see the need to reduce stimulus in the near future as it kept the benchmark interest rate at a record low.

The Monetary Policy Committee, led by Governor Mark Carney, voted 7-2 to hold at 0.25 percent, as predicted by all 59 economists in a Bloomberg survey. Ian McCafferty and Michael Saunders maintained their push for a 25 basis-point increase, which would reverse the rate cut put in place after the Brexit vote in 2016.

The majority of the MPC judged that, if the economy develops as predicted, “some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target,” minutes of the meeting showed.

While the vote to leave the European Union has cast a shadow over the economic outlook, the resulting drop in the pound has pushed up inflation. The bank now sees the rate of price gains exceeding 3 percent next month and remaining above the 2 percent target for years, while unemployment has fallen to a 42-year low.

The pound strengthened after the decision, climbing 0.5 percent to $1.3278 as of 12:05 p.m. London time.

On Thursday, the MPC reiterated a warning from its August meeting that monetary policy could need to be tightened “by a somewhat greater extent” than market rates imply. It also said that any increases would be “at a gradual pace and to a limited extent.”

The amount of spare capacity appears to be disappearing more quickly than policy makers had anticipated, the bank said. BOE staff see overall economic growth on track for 0.3 percent in the third quarter.

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Still, tepid wage growth is darkening the outlook for consumer spending as uncertainty about the nation’s future after Brexit prompts companies to keep a lid on investment and pay. There remain “considerable risks” to the outlook, the minutes said.

For investors, the prospect of BOE tightening early next year became more realistic after Tuesday’s report showing inflation picked up to 2.9 percent in August. Traders were pricing in an about 80 percent chance of a February move before Thursday’s decision, up from 44 percent last week.

The decision was the first for policy maker Dave Ramsden, who was appointed to replace Charlotte Hogg. The MPC has returned to its full complement of nine members for the first time since March.

— With assistance by Harumi Ichikura